Many people don't shop their homeowner's insurance as the payments are made by their mortgage company and they don't think of it as an expense. But you ARE paying for this, through your mortgage escrow payments, so it pays to shop this around.

A reader writes:

I believe insurance is a scam for the most part (just like warranties), but required when having a mortgage.

The cost of house insurance is based primarily on the replacement cost of the house. And, according to my insurance broker, my $120,000 house has a $180,000 replacement cost. Talk about BS (and a conflict of interest). I'd like to have enough insurance to cover just the house, and not all my junk that I've yet to sell on eBay.

I've seen software that estimates replacement costs, and some home inspectors or home appraisers create estimates, with all sorts of varying prices. I've also looked at what the "Improvement Value" is according to my property tax statement.

Do you have any particular thoughts about this? Should I get a professional to come up with the replacement cost, or just go with the minimum required by my bank?

I, too, was alarmed by the "replacement cost" estimates proffered by insurance agents. Where do they pull these numbers out of? Why pay for more insurance than you need?

It turns out that going to a lower replacement cost really doesn't save too much money, however, compared to raising your deductible. However, you should consider having some insurance, at least, to cover at least part of the reconstruction costs. If you are like me - and handy, you could cut the replacement costs considerably - by doing your own cleanup, for example, or you could just take the check, sell the lot, and buy a different home.

Frankly, I think I would take that route if my house burned to the ground. I would negotiate with the company for the largest amount, take that in a check, sell the lot to a developer, and buy a different house. I have no burning desire to get into the home construction business or live in a construction zone for a year or more. And houses are a fungible commodity.

But for some reason, the insurance companies think we are all so emotionally attached to our homes that we just have to have them back just the way they were! But even with a super-insurance policy, you are never made whole, of course - a lot of heirlooms and mementos are gone for good.

I had a friend in Annapolis, Maryland, whose home burned to the ground after some kids broke in and had a party. The insurance company paid for them to stay in a rental home, the complete reconstruction of their home, replacement for all their furnishings, and every last little thing. It was pretty amazing what they covered, they said, and they felt almost guilty, as it seemed that they came out ahead (with all new stuff, a new house, etc.) as a result - at least financially.

Having your house burn down should not be a like a spa vacation - and neither should wrecking your car. But many folks prefer coverage like that, and if they want to pay the extra premiums for it, so be it.

And after the home was rebuilt, they sold it the next year. Too many memories, they said. I am curious, but I wonder if that is a typical outcome in a catastrophic fire like that. And if so, why not just cut to the chase, take the check, and buy another house?

In my mind, I would rather pay less over time ($500 a year times 30 years is a lot of money with interest) than to be over-insured. And over-insurance promotes insurance fraud, which is why these "Cradle to Grave" policies are so expensive - whether they are for your car, boat, house, or health.

And bear in mind, too, that while catastrophic fires and tornados do occur, you are far more likely to have a less than catastrophic event (a fire that guts your kitchen or garage, a tree falling through the roof, etc.).

If you want to reduce coverage, call your lender and ask them:

1. What is the highest deductible they will go to, and

2. What amount of coverage they require.

I had a loan through Citibank, and they needed a deductible less then 5% of the mortgage amount, as I recall. Check with your lender to be sure.

Then, SHOP AROUND. Different insurance companies have different polices and limits. And insurance agents often make more money selling you MORE insurance - hence the tendency of agents to tack on "uninsured motorists" coverage and a $10,000 medical policy on your car insurance, without you asking for it, and then saying that is the "lowest price" they can give you.

I went to a local Independent Agent in New York, and he reduced my homeowners policy from $1200 a year (State Farm) to $850 a year - and even threw in liability coverage for my boat!

We went to a $15,000 deductible, as I recall.

Even owning your home free and clear, it is not a bad idea to have SOME coverage in case of a tornado or fire. I recall a friend of mine whose parents "didn't believe in insurance" and of course, their house burned down and they were left with nothing.

But getting back to your original question - how do you estimate the reconstruction costs? Most builders use a cost/sq. ft. for your area, and replacement cost can be determined by measuring the square feet and then using this cost number. And often this is the number they use.

And oftentimes, the insurance company writes to this number and you can't get them to drop it. But like I said, shop around and see if there is a company that will write to a number you are comfortable with.

You can get a professional appraisal, of course, and appraisers can calculate "replacement cost" - but again, they are just doing the old square foot times cost per square foot gag, which is nothing more than a rough estimate.

Tax assessed values are, of course, meaningless. They are just numbers made-up to calculate tax values. Never, ever, use a tax assessors value for anything other than calculating your property taxes! For some reason, many folks think the tax assessors numbers are a market value.

Contents coverage is another area where it seems the insurance companies are just promoting fraud and abuse. They often provide staggering numbers for your contents - often based on a flat percentage of the value of the home. Of course, you have to be able to show that you had that sort of contents value, so it makes sense to document what you had and put that record in a safe place, if you own a lot of expensive junk.

Again, some companies just use these flat coverage rates and won't lower them. So shop the policy and see what you can get - if yo don't feel you need the coverage. But other companies assign a value to the home and contents and then there is the price, take it or leave it. Raising deductibles and shopping companies (rates vary all over the place) are the only real way to cut costs, I think. The difference in overall value may not reduce the cost much - but it never hurts to look!

Here on the island, we have to have homeowner's insurance, a wind policy, and a flood policy - and these were costing more than $3000 a year! (1% of the home value!) Like with my car insurance, I could afford to own the house, but not to insure it. I decided to take a risk, go to a higher limit and lower coverage.

Bear in mind that for a $150,000 house, $50,000 of the value may represent the lot itself (depending on location). So having $150,000 of coverage, in my mind, makes no sense at all - you can't burn down the lot! But in many areas of the country, the cost of rebuilding the home is higher than the sales price of the home (hint right there to people who are thinking of building a home!).

And note that after natural disasters, insurance adjusters may show up at your house and offer to write you a check on the spot - which may or may not be a good idea. For example, a friend had a tree limb fall through their pool enclosure after a hurricane in Florida. The adjuster shows up and hands her a check for $10,000 for a new pool enclosure. She calls the guy who built it, and he repairs the existing enclosure for $5,000. In other cases, adjusters low-ball homeowners on the premise that if they take 75% of market value, they can settle the deal today. In many of the latter cases, people end up coming out behind.

But insurance is a personal decision and if the costs are not staggering, then it makes sense to go with the coverage they offer. If you are paying less than $1000 a year for insurance, you may be able to save a hundred or two, but not any really big savings.

For me, I was able to save hundreds a year on the policy in New York, and $1500 a year in Georgia. This is not chump change! I am more willing to take risk, as if there was a claim event, I would use my own sweat equity to do at least part of the cleanup and reconstruction myself. Others are not so able.